LKQ Corp (LKQ) 2015 Q4 法說會逐字稿

Greetings and welcome to the LKQ Corporation fourth quarter and full-year 2015 earnings call.

(Operator Instructions)

As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Joe Boutross, Investor Relations for LKQ Corporation. Thank you, Mr. Boutross, you may begin.

Thanks, Devon. Good morning everyone and welcome to LKQs fourth quarter and full-year 2015 earnings conference call. With us today are Rob Wagman and Nick Zarcone.

Please refer to the LKQ website at lkqcorp.com for our earnings release issued this morning, as well as the accompanying slide presentation for this call. Now let me quickly cover our Safe Harbor. Some of the statements that we made today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions, or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC.

During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation.

And with that I am happy to turn the call over to our CEO, Rob Wagner.

Thank you, Joe. Good morning and thank you for joining us on the call today.

We are again delighted with our quarterly and full-year results. And before I provide an update on our operations, let me briefly highlight a few key financial metrics from the fourth quarter and for the full-year 2015.

Turning to slide 3, Q4 revenue reached $1.75 billion, an increase of 3.8% as compared to $1.68 billion in the fourth quarter of 2014. Excluding the impact to our other revenue category, revenue grew 8% for the quarter. Net income for the fourth quarter of 2015 was $95.1 million, an increase of 18.1% as compared to $80.5 million for the same period of 2014.

Diluted earnings per share of $0.31 for the fourth quarter ended December 31, 2015, increased 19.2% from $0.26 for the fourth quarter of 2014, while adjusted EPS increased from $0.27 to $0.32. Organic revenue growth for parts and services was 6.2% for the quarter and on a constant currency basis total growth for parts and services was 10.9%.

I am particularly pleased with our EPS performance given that the effect from FX and weakness in commodity prices, which combined, negatively impacted the year-over-year change in EPS by $0.03. For full-year 2015 revenue reached $7.19 billion, an increase of 6.7% as compared to 2014. The first time ever, revenue surpassed $7 billion, a major milestone for the Company. Net income for the full-year was $423.2 million compared with $381.5 million for the prior year, an increase of 10.9%.

Organic revenue growth for parts and services for 2015 was 7%, a solid performance given the tough comp of 9% in 2014. On a constant currency basis, total revenue growth for 2015 was 10.1%, while total revenue growth for parts and services was 14.1%. Our adjusted EPS for all 2015 was $1.42 representing an increase of 11.8% from $1.27 reported in 2014. Again, net of the adverse impact of FX in commodity pricing.

Now a brief update on our operations, which are highlighted on slide 6 and slide 7. During the quarter our North American operations continued to benefit from various macro trends. According to the US Department of Transportation, miles driven was up 3.5% in 2015 as compared to 2014. Miles driven in 2015 was the highest number recorded since 1990. With low gas prices and ongoing improvements in the unemployment rate, we do expect a continuation of this trend.

Though initially a headwind, as newer vehicles requiring repair tend to receive new OE parts, the increase in the SAR rate presents attractive growth prospects for alternative products as these vehicle age. The SAR rate for 2015 was 17.4 million units compared to 16.4 million units for 2014, a 6.1% increase year over year. Auto industry analysts expect this trend to continue in 2016, which again should be good for our North American collision businesses, as well as our specialty segment. These trends help drive North American organic growth for parts and services of 5.6% in Q4 despite the mild weather patterns we faced throughout December. During Q4 and for full-year 2015 we purchased over 73,000 and 288,000 vehicles respectively, for dismantling by our wholesale operations, which is essentially flat year over year for both periods.

During Q4 our price at auction was flat compared to Q4 2014, but we were also buying a younger vehicle by over 1 year. This younger vehicle procurement strategy continues to perform well and played a role in the improvements we witnessed in Q4 year over year in North American gross margins. For our North American aftermarket business, we continue to see improvements in our total collision SKU offerings, as well as the total number of certified parts available, each growing 13.2% and 32.2% respectively in 2015.

In our self-service retail business during Q4 we acquired over 112,000 lower cost self-service and crush only cars, which is a 4% decrease over Q4 2014. For full-year 2015 vehicle procurement was approximately 471,000, a decrease of 8.4% from 2014. As mentioned on past calls, this reduction in the self-service procurement was intentional given the dynamics we faced with the scrap markets throughout the year. Nick will provide more detail on scrap during his comments and in particular its impact on revenue.

Turning to the 2015 results of our ongoing intelligent parts solution initiative with CCC Information Services, the revenue and number of purchase orders processed through the CCC platform during 2015 each grew 66% respectively year over year. Clearly, the trend toward shop adopting this feature within the CCC platform continues to gain traction with this initiative currently annualizing over $28 million in revenue for LKQ. And last on North America, I want to provide an update on our productivity initiatives to identify potential operational efficiencies.

As mentioned on previous calls we have identified several significant opportunities in four key areas with one of them being procurement. During the quarter, AlixPartners led an internal focus group tasked with assessing our current maintenance, repair, and operations or MRO, and indirect spend categories and the details behind what we can change or can consolidate. Following this extensive analysis, we modified and redefined several positions within our procurement team in an attempt to optimize our ability to capture the potential savings uncovered.

Although early in the process, we are extremely encouraged by the savings we could achieve in areas of both direct spend on aftermarket parts, and the MRO, and the indirect spend categories such as logistics, corrugated boxes and shipping supplies, vehicle rentals, IT hardware, and various services. While it will take a few quarters for the savings on parts purchases to be realized and rolled through our inventory turns we anticipate we will begin to realize some of the savings on the other items in late Q1 of this year.

Now moving onto our European operations. In Q4 our Europe segment had organic revenue growth of 6.3%, and acquisition growth of 5%, which was offset by a decrease of 6.7% related to foreign exchange rates. During Q4, ECP drove organic revenue growth of 8.9% and for branches open more than 12 months ECPs organic revenue growth was 6.8%. Solid performance given that the UK witnessed one of the warmest and most mild winters since 1985.

During the quarter, ECP opened one additional branch bringing our UK network to 199, an increase of 110 branches since we acquired ECP. With the continued market opportunities in the UK, I'm pleased to announce we approved an additional 13 branches in 2016. During Q4, collision parts sales at ECP had year-over-year revenue growth of 21.2%. I'm pleased with continued double-digit performance in this line of business, especially given the mild Q4 weather in the UK and a tough 2014 comp.

And lastly, on ECP, I would like to provide a brief update on our new 750,000 square foot national distribution warehouse currently under development in the UK. Upon completion of the building shell in early February 2016, we began our lease payments and also started absorbing duplicate expenses that will continue through 2017, as we begin to move towards finalizing the full consolidation of our existing NDCs into this state-of-the-art facility. Nick will cover the impact of those costs shortly.

During Q1 we began installing interior racking in preparation for using the facility for bulk storage in Q2 with the automation and more sophisticated storage spaces scheduled to be completed in 2017. For the quarter and for full-year 2015 we did not incur any material costs related to this project.

Now turning to our Sator business. With the network build up in the Netherlands largely completed, via a combination of acquisitions and innovative partnering solutions, Sator has now turned its focus towards integrating the systems in place at the wholesale level. By year in 2016, we planned to have consolidated from six systems to two with integrated end-to-end inventory and customer visibility, a key enabler for driving logistical in working capital improvements in the business.

Now to our specialty segment. Our specialty segment continued its strong performance by posting year-over-year total revenue growth of 16.2% in the quarter, including the benefits of the Coast acquisition and a strong organic revenue growth of 8.1%. During the quarter all integration activities from the Coast acquisition continued as planned. In total, our specialty team integrated five of the 17 Coast warehouses into our existing KAO distribution centers with two additional warehouses integrated in January.

In addition, during Q4, our specialty team stocked the 360,000 square foot warehouse in Michigan, mentioned on the previous call, and in January we officially began shipping product from this facility. I'm also pleased to announce that in 2015 the specialty team achieved two significant milestones. For the first time specialty eclipsed $1 billion annual revenue and made over 1 million delivery stops. Congratulations to our specialty team for reaching such an impressive milestone.

Now onto corporate development. In December 2015 the Company announced it had signed a definitive agreement to acquire Rhiag-Inter Auto Parts a leading pan-European business-to-business distributor of aftermarket spare parts for passenger cars with commercial vehicles for an enterprise value of EUR1.04 billion. This acquisition gives us access to the rapidly growing Eastern European market and of course, Italy, where Rhiag base business is well-positioned for continued growth beyond their current 15% market share.

The targeted closing for Rhiag is progressing as expected with all the filings required by the EU and Ukraine regulatory authorities submitted, accepted, and deemed complete. Both regulatory agencies are now in the final review process and we anticipate this deal to close in the first half of 2016. In addition to the Rhiag announcement during the fourth quarter of 2015, we acquired a wholesale salvage business in Sweden and an interest in a pan-European distributor and remanufacturer of engines and power train products.

Lastly, earlier this month the Company sold its interest in ACM Parts, our JV in Australia to our JV partner Suncorp. LKQ played a pivotal low in the creation of ACM Parts and we will continue to have a strong working relationship with the business. Chief formal strategic alliances between ACM parts and LKQ, particularly those related to aftermarket parts sourcing and technology, will remain in place. This transaction allows us to maintain a presence in Australia while redeploying our capital both human and financial towards the multiple opportunities we have in Europe.

Clearly, 2015 was another very active year with our development efforts resulted in the completion of 18 acquisitions, which combined expanded our geographic footprint and extended our leadership position in each of our operating segments.

At this time I would like to ask Nick to provide more detail and perspective on our financial results and our 2016 guidance.

Thanks, Rob, and good morning to everyone on the call.

I'm delighted to run you through the financial summary for the quarter. And over the next few minutes I will address the consolidated results of our Company and review the performance of each of the three segments before touching on the balance sheet and addressing our guidance for 2016.

For those of you who accessed our earnings presentation on the website you'll notice that we have included detail on both the fourth quarter ended December 31, 2015 as well as the full-year of 2015. My comments was generally follow the flow of the presentation, but as usual I will primarily focus on the quarterly results. The short version of our financial performance in the fourth quarter 2015 would be a repeat of the third quarter. Save for our self-service operation, we had a great quarter in which we experienced solid revenue and earnings growth despite the continued headwinds from lower scrap prices and the strong dollar.

As Rob mentioned, consolidated revenue for the fourth quarter was $1.75 billion representing a 3.8% increase over last year. That reflects an 8% increase in revenue from parts and services offset in part by 38% decline in other revenue, primarily related to the continued decline in prices for scrap steel and other metals, which I will address in a few minutes. The components of the parts and services revenue growth include approximately 6.2% growth from organic activities, plus 4.7% from acquisitions equating to constant currency growth of 10.9% before backing out the translation impact of FX, which was a 2.9% decline.

I will provide a bit more detail on the organic growth of each business as I walk through the segment results. As noted on slide 11 of the presentation, consolidated gross margins improved 40 basis points to 39.9% during the quarter. The uptick reflected approximately a 50 basis point improvement from operations offset by a 10 basis point decline due to revenue mix as the revenue growth in our specialty business, which has the lowest gross margin structure, outpaced that of our other operations. We lost about 20 basis points of efficiencies in our operating expenses, again largely due to our self-service operations. This operation continued to experience a meaningful decline in revenue related to the lower scrap steel prices and an uptick in expenses, the combination of which resulted in materially higher cost as a percent of revenue in each expense category. Outside of the impact of metal prices, our consolidated distribution cost as a percent of revenue benefited from lower fuel prices and our SG&A expense benefited from the acquisition integration synergies in our specialty operation.

Segment EBITDA totaled $193 million for the quarter, reflecting a 5.7% increase from 2014. As a percent of revenue, segment EBITDA was 11.0%, a 20 basis point improvement over the 10.8% recorded last year. The increase in EBITDA, when combined with lower relative levels of depreciation and amortization and interest expense, allowed pretax income to increase by 7.5% during the fourth quarter of 2015 compared to the same period last year and pretax margins expanded by 30 basis points to 8.0% from 7.7%. Our net cash rate during the fourth quarter was 30.4%, down from 37.3% in 2014.

The tax rate reflects an effective rate of 34.55% for the quarter, as well as, a favorable adjustment to get us to that level on a year-to-date basis as we have been accruing at an effective rate of 34.75% through the first three quarters. The 2015 annual rate reflects a favorable shift due to a relative increase in earnings source from the UK which has a low tax rate. We also benefited from a few discrete items during the quarter, including a couple of deferred tax adjustments, due to favorable state or foreign tax rate changes, a couple of refunds, and some thin 48 reserve releases due to settlements or statute expirations.

As Rob mentioned, fully diluted EPS for the quarter was $0.31 compared to $0.26 last year, a 19% increase and adjusted earnings per share, before restructuring charges, was $0.32 per share versus $0.27 again reflecting a 19% improvement. A solid fourth quarter brought our adjusted EPS for the year to $1.42, which is exactly the midpoint of our guidance provided in February of 2015, notwithstanding the fact, that the plunge in scrap prices had a $0.07 negative impact and the strong dollar had a $0.04 negative impact on our year-over-year EPS growth during 2015.

As mentioned in December, starting in 2016, we're changing the definition of adjusted EPS to exclude the after-tax impact of intangible amortization. As highlighted in appendix 4 on page 32 of the slide deck, 2015 adjusted EPS under the new definition is $1.49 per share. As highlighted on slide 13, the composition of our revenue continues to change due to the varying growth rates of our different businesses and the impact of acquisitions. Since each of our segments has a different margin structure, this mix shift impacts the trend in consolidated margins and that will become more accentuated once we close the pending Rhiag acquisition and we begin to consolidate the Rhiag results.

And with that let's get into the details on the segments. Revenue in our North American segment during the fourth quarter in 2015 increased to $1.018 billion or almost 1% over 2014. This is the combination of a 7.9% growth rate in parts and services, offset by a 39% decline in other revenue, again the latter of which was due to the lower prices we received for scrap steel and other metals. Importantly, organic growth in North American parts and services was 5.6%. All in all, this was a very solid quarter.

Margins in North America during the fourth quarter increased 90 basis points relative to the comparable period of the prior year to 43.2% from 42.3%. This increase was primarily due to our improved pricing to customers and our aftermarket operations, improved procurement in our salvage operations, and a mix shift away from self-service which has lower gross margins than our wholesale operations. With respect to operating expenses in our North American segment, we lost approximately 90 basis points of margin compared to the comparable quarter of 2014.

On the upside we continued to experience improvements in fuel costs relative to last year as diesel fuel averaged $2.43 per gallon compared to $3.58 per gallon. As a percent of revenue fuel costs declined by 40 basis points while we experienced some modest increases in facility and SG expenses in our wholesale business. Unfortunately, our self-serve unit experienced an increase in operating expenses, but meaningfully lower revenue, due both to the significant decline in scrap prices and a modest reduction in the number of cars processed.

As a result operating expenses as a percent of revenue for our self-service operation increased very significantly on a year-over- year basis. Slide 16 takes a closer look at scrap steal prices over the past 24 months. You will note that the average price we realized in Q4 of 2015 was approximately $82 a ton down 56% compared to the average of $187 a ton realized in Q4 of last year. In total the lower pricing for scrap steel reduced our revenue for the quarter by approximately $26 million on a year-over-year basis.

The decline in scrap steel prices had approximately a $0.03 negative impact on our EPS during the quarter. Scrap sale prices have leveled off in the last few months and hopefully we will not see continued deterioration. While we have been dealing with falling scrap prices for a while, during Q4 we also experienced a continued material decline in the prices received for other metals that are a residual of our recycling activities including: aluminum, copper, platinum, palladium and rhodium which were down between 20% and 45% compared to the fourth quarter of last year.

So while revenue from scrap steal was down $30 million during the quarter, revenue derived from selling these other precious metals and catalytic convor -- catalytic converters, excuse me, was down an incremental $16 million compared to Q4 of last year. So in total, the falling metal prices depressed the North American business by approximately 160 basis points during Q4 of 2015 relative to the margins in the prior year. In total, for the North American business during the fourth quarter of 2015, the total EBITDA was $131 million reflecting a 1.3% increase compared to last year. As a percent of revenue EBITDA for North America was 12.8%, flat with the comparable period of the prior year. In both dollar and percentage terms the wholesale operations improved relative to the comparable period with EBITDA margins being up 70 basis points, but the overall segment results were flat as a result of the decline at our self-service operation.

Moving onto our European segment. Total revenue in the fourth quarter accelerated to $487 million from $465 million. Organic growth in Europe during the quarter was 6.3% reflecting the combination of 8.9% growth at ECP and just under 1% at Sator. The impact of acquisitions in Europe resulted in an additional 5% increase in revenue so on a constant currency basis European revenue was up 11.3%. These gains were offset by a 6.7% decline due to the translation impact with the strong dollar, creating a negative impact on revenue and resulting in total growth for Europe of 4.6%. Gross margins in Europe increased to 38.9%, which was 160 basis point improvement over the comparable period of 2014.

Both ECP and Sator experienced higher gross margins from operations as we continued to benefit from improved procurement in the UK and the internalization of the gross margins from acquisitions in the Netherlands. These are the highest quarterly gross margins we have achieved in Europe since early 2012. With respect to operating expenses in Europe, we lost about 40 basis points due largely to higher SG&A expense at our UK operation reflecting higher personnel costs to support the growth of the business, including our e-Commerce development.

European EBITDA totaled $47.4 million, which was a 23.6% increase even after taking into account the impact of the strong dollar, which had a negative impact of about $3 million. As a percent of revenue, European EBITDA in the fourth quarter of 2015 was 9.7% versus 8.2% last year reflecting a 150 basis point improvement.

As noted on slide 19, relative to the fourth quarter of 2014 the pound declined 4% and the euro declined 13% against the dollar. We estimate that for the fourth quarter the strong dollar reduced European revenue by approximately $31 million, compared to Q4 of last year and removing the impact of the currency swings would have resulted in Q4 revenue growth of 11.3%. Given the significant margin improvement, constant currency EBITDA growth was 32%, which we believe is quite strong. When taking all currencies into account, the strong dollar reduced Q4 year-over-year EPS growth by a fraction of a $0.01 compared to last year.

Turning to our specialty segment, revenue for the fourth quarter totaled $245 million, a 16% increase over the comparable quarter of last year. Obviously the impact of the acquisition of Coast Distribution in August of 2015 accounted for the largest component of growth at 9.5%, but the organic growth rate of 8.1% was also quite strong.

Gross margins in our specialty segment for the fourth quarter declined by 280 basis points compared to last year largely due to the impact of the Coast acquisition. On the bright side, operating expenses as a percent of revenue in specialty were down by 150 basis points as we continued to see the leverage from integrating the acquisitions into our existing distribution network, as well as the benefit of the lower fuel prices. EBITDA for the specialty segment was $15 million, essentially flat with 2014 and as a percent of revenue EBITDA for the specialty segment decreased by 120 basis points to 6.1%.

This is a highly seasonal business and the fourth quarter is by far the weakest as demonstrated by the graph in the lower right-hand corner of slide 20. As highlighted during the third quarter call, we fully anticipated the Coast acquisition with its focus on the RB marketplace would accentuate the normal drop in fourth quarter margins and it did.

Now let's move onto capital allocation which given the working capital swings, the lumpiness of capital spending, and the timing of acquisitions, is best viewed on a full-year basis as presented on slide 22. You will note that our after-tax cash flow from operations for 2015 was approximately $530 million, as we experienced a strong increase in earnings and only a moderate increase in working capital. In 2015 we deployed $330 million of capital to support the growth of our businesses, including $170 million to fund capital expenditures and $160 million to fund acquisitions and other investments.

So for 2015 we generated $200 million of free cash flow and we used all of that and some excess cash to repay $224 million of our debt. We closed the quarter with approximately $87 million of cash, of which about $59 million was held outside of the United States. At December 31, 2015, we had $1.6 billion of total debt outstanding, which reflected a leverage ratio of approximately 1.7 times as defined by our credit agreement.

As announced earlier this month, we completed an amendment to our credit facility increasing this total capacity by $900 million to a total of $3.2 billion and extending the maturity to January of 2021. Today our total availability under the new facility is approximately $2.2 billion, which is more than sufficient to fund the acquisition of Rhiag and support the continued growth of our businesses. Finally, as noted in our press release, we have provided some guidance on some of our key financial metrics for 2016. Please note that our guidance excludes any impact from the proposed Rhiag acquisition, which we hope to close in the second quarter.

As it relates to the organic growth for parts and services, we ended up at 7% for 2015 and have set the full year range for 2016 at 6% to 8%, essentially consistent with our recent experience. Our range for adjusted EPS, which now excludes the impact of intangible amortization is $1.59 to $1.69 a share with a midpoint of $1.64. Assumed in that estimate is approximately $19 million of after-tax amortization or about $0.06 per share. Said another way, based on the former reporting definition, the midpoint of adjusted EPS would be $1.58, which is consistent with the current analyst estimates for 2016.

Going forward, I would ask that all of the analysts adapt to the new adjusted EPS format so we have consistency in the EPS estimates. To assist with some of the year-over-year comparisons, appendices 4 and 5 of the call deck include a reconciliation to the new adjusted format on an annual basis from 2015 -- from 2011 to 2015 and on a quarterly basis for the four quarters of 2015. The EPS guidance all assumes that the pound sterling, euro, and Canadian dollar remain at budgeted levels of GBP1.45, EUR1.10 and CAD0.70 respectively, and importantly that scrap remains at current levels as well.

On a year-over-year basis I would note that the lower exchange rates have a $0.03 per share negative impact on earnings. And consistent with what we presented in the second quarter call back in July, the new Tamworth distribution facility will have another $0.03 negative impact during 2016. So that is a combined headwind of $0.06 per share compared to 2015 and at the midpoint of the guidance we're still expecting a 10% year-over-year improvement.

The corresponding adjusted net income guidance is from $490 million to $520 million. Our assumed tax rate for 2016 is 34.7%, reflecting the slightly lower relative earnings contribution coming from the low tax rate in the United Kingdom and the impact of the new distribution facility in Tamworth will slow the earnings growth from that country.

Our guidance from cash flow from operations is approximately $520 million to $550 million with a midpoint of $535 million, a small increase over 2015 reflecting continued growth in cash earnings, offset by more meaningful investment in working capital during 2016 compared to 2015. And, finally, we set the guidance for capital spending at $170 million to $180 million, up just a bit over 2015.

At this point I will turn the call back over to Rob to wrap up.

Thanks, Nick.

To summarize, we faced some challenging headwinds this year with scrap and currency, two dynamics that are outside of our control. Yet, despite these challenges we delivered solid results for 2015. Now looking ahead. Since the 2008 recession in North America we've witnessed an increase level of road congestion which undoubtedly has played a role in the number of the paid claims increasing every year since 2009.

Also the number of vehicles in the US continues to rise with 264 million registered vehicles on the road at the end of 2015. A year where we witnessed the highest growth rate since 1999. These trends coupled with the recent upswing in miles driven and lower gas prices should continue to provide a nice tailwind to our collision business. In the UK, the mileage problem on all roads and classes and the number of vehicles licensed reached the highest levels on record in 2015, trends that should continue to benefit our branch network across the UK.

At Sator we have largely completed our three-step to two-step transformation and are now prepared to move the business forward as a single business operating unit. In addition, with the pending acquisition of Rhiag, our European strategy continues to evolve and once closed, Rhiag will solidify our market-leading position across all of Europe. Yet we have more runway to grow in this fragmented market. Also, we continue to be pleased with the performance of our specialty segment and the timing of our entry into this large and highly fragmented market.

The project in the projected upward trend in the SAR rate should continue to benefit the segment. In closing, I am proud of the hard work and dedication of our 31,000 plus employees delivered for the Company, our stockholders and most importantly our customers in 2015. I'm equally proud of team's commitment on delivering continued and consistent performance as reflected in our 2016 guidance.

To further that point, over the last 16 years the LKQ team has delivered on average 7.5% organic growth. An accomplishment that few can claim, yet one that we have delivered predictably and consistently each and every year.

Devon, we are now prepared to open the call for Q&A.

Thank you.

(Operator Instructions)

Tony Cristello BB&T Capital Markets.

The first question I had stems from the EBITDA in the margin. The US it's holding steady. Some of the margins you talked about today were actually better than would have been expected. I'm just wondering how that margin improvement will translate in Europe? And is this a situation where you will be able to close the gap knowing that they are two totally different businesses, but yet there is some efficiencies that have yet to have been extracted?

Tony, this is Nick. Good morning.

Good morning.

Obviously, the North American margins are a little bit of a tale of two cities, right? With the increase in EBITDA margins in the wholesale business, I mentioned on the call, about 70 basis points against a drop in the self-service margins. The margins in Europe hit double-digits for the year. There are a lot of folks who, 12 months ago were wondering how many years it was going to take us to get to double-digit margins in Europe, and we are at 10.1% for the year. So we are very proud of that.

We do think that ultimately the margins in Europe will have the ability to tread North, though I would caution folks that actually in 2016, because of the Tamworth facility, I quantified that as $0.03 per share. The reality from a margin perspective if you take the roughly $13 million of P&L hit due to Tamworth and you lay that against our 2015 results coming out of Europe, we would lose about 65 basis points to 70 basis points of margin just because of that facility.

Taking that aside, we think we can get some improvement margins in Europe in the coming years as we continue to rationalize. We think that once the Rhiag transaction has rolled in that will give us incremental opportunities to get some savings on procurement, some savings on cataloging, some savings on the e-Commerce platform, private labeling, all the things that John is hard at work on over in Europe.

That's helpful. And then I wanted to talk a little bit about the strategy to continue to get later model buying at the auctions. Bigger picture if you look at the touch points for repair on today's vehicles, are these later model vehicles actually providing you with more opportunities to sell an LKQ part?

Absolutely, Tony. And the other part import to note is these are higher-priced parts. We like to give an example of the F-150, the 2015, the taillight has a blank spot detection. It's an $800 taillight. And the 2014 till light was $85, because it was just a piece of plastic.

These later model cars will give us upside on pricing as well as availability as they work through the SAR rate. We think that with a strong SAR rate for the last couple of years, once they start hitting that sweet spot that's going to provide a nice tailwind. And we are about six months to a year from those really starting to hit in mass.

Okay. And just my last question with Rhiag, you talked about the second quarter. Is there any thought in terms of the accretion that it may have now based on the timeline of the close? I think originally you had said somewhere in the neighborhood of $0.11 if I'm not mistaken.

Yes. That is still our best thinking, Tony, $0.11 per share on our new adjusted EPS basis. So you would layer that on top of the midpoint of the $1.64 that we just referenced.

Tony, we are absolutely on pace to close when we thought we would early Q2. So we are very well along that path with the authorities over in Europe.

Okay. Great. Thank you for your time.

Thanks, Tony.

Craig Kennison, Robert W. Baird.

Just a follow-up on what Tony had to say there. Is the $0.11 the annual impact, or would that be the impact as if you owned it for six months?

That is a partial year, Craig. It is not the annual impact. You will notice that in 2017 the EPS accretion that we gave folks back in December was $0.21 per share.

Got it. That's helpful to clarify that.

And then with respect to your European operational priorities, I think you addressed it a little bit Nick in your prior response. But could you had a little more color as far as how we should evaluate your progress in Europe in terms of the goals you have set operationally?

Craig, this is Rob. As Nick mentioned, John is hard at work, and obviously we are very pleased with the double-digit EBITDA that we put up this year. The priorities would be with Rhiag coming on board is to get that integrated into the system and on purchasing e-Commerce, as Nick mentioned. We've got some work to do there.

As I mentioned in my prepared remarks, Sator is basically done from the three-step to two-step conversion. We are anticipating getting back to normal there. As I also mentioned we are going from six systems to two systems. The work at Sator is to finish that, get the systems on one plate, get the Rhiag integrated, and of course UK still opening branches, et cetera and working that game plan.

The other thing I would like to add as I mentioned in my notes, we did take a JV interest in a remanufacturer in Europe. We are going to start bringing those products into our different operations, so that's another opportunity, as well. Those are the major priorities over in Europe this year.

Thanks, Rob.

And then finally, you have this Tamworth distribution center, which is exciting as it rolls out. Should this be considered a model for what you plan to do in Europe once you've got most of your footprint laid out?

I think it is fair to say we will combine major warehouses where we can. The Tamworth II facility is 750,000 square feet and semi-automated. That would be the plant going forward as we build out the network in Europe, is to put a massive DC with semi-animation, as well. Assuming this what goes well and right so far it is on plan to budget and to the timeliness. We are very excited about getting it online, because I think it will make us much more efficient.

So that is dilutive early in the process, but, obviously, accretive down the road. But when we think about that accretion down the road, should we also have in the back of our mind that you may add additional DC's the could be, again, short-term dilutive, long-term very accretive?

I think that's fair. We continue to work on Europe and the opportunity presents itself, we would likely put another DC somewhere in Europe.

Great. Thank you so much.

Thanks, Craig.

Nate Brochmann, William Blair.

Rob, thanks for some additional color on the AlixPartners consulting project in terms of where you are going with that. I was curious a little bit in terms of if you look back at one year ago when you started with that in terms of the progression and uncovering additional opportunities relative to your original expectations. And then the second part of that is, how much of that improvement are you including in your guidance and whether there could be more upside as you undercover more opportunities?

Sure I will let Nick answer the guidance but let me talk first about what we found so far. We are very pleased with the work completed. I mentioned on my prepared remarks about the purchasing. But we are also seeing equal progress in our sales initiative, as well as our routing software. So the fourth leg of that, of course, was the efficiencies that are dismantling.

Just to give you an update on that, we have hired a six Sigma Black Belt that is working on that project, as well. So these will take time to work through the system, but we are in the process of consolidating our sales centers into call centers, regional call centers. And then on the routing software rolling out every one of our trucks that we will know exactly where that truck is and be able to be much more customer focused on their timeliness of delivery and then also taking out costs on that, because we will be able to be more efficient in the routing. As far as the guidance, Nick?

Sure. Obviously the benefit that we gain from procurement pricing in the aftermarket parts marketplace, it takes time to get those PO's in place. We have most of the adjusted pricing locked down with our vendors. But now we have to start placing orders, the product needs to get shipped over the ocean, delivered to our warehouses, and then we have to turn it through the inventory.

So you're not going to see a whole lot of impact there in 2016. On some of the other items, we do believe we will begin to get some flow-through late Q1 and early Q2. As far as our guidance, is there a meaningful impact there? No. The biggest portion will come from the aftermarket procurement. And then, just bigger picture along with that too, Rob, is philosophically obviously it's always been about putting the pedal down in terms of growth. And obviously that is to priority number one and a lot of potential acquisitions, particularly over in Europe and still more to go in North America.

But, obviously, particularly with that project as well as procurement initiatives in Europe there is a little bit of now focus, in terms of getting efficiency improvements, and generating the more consistent margins, and hopefully more consistent cash flow. How do you philosophically think about that now in terms of running the organization?

I think it is making a much more efficient, Nate. Through the years we had operated decentralized, and I think getting consistencies on our sales process and how we measure our sales reps across the country and across the world, quite frankly, is going to make us much more efficient. Not only do we get maybe some headcount efficiencies, but also just being able to track our people on metrics that we think are key to driving the business.

It's an important initiative in our Company. And as far as the writing software goes that's equally important. Being able to give our customers better service, and that will definitely be a result of the starting software. It's an amazing software that allows us to track the truck down to the mile of where it is and its ability to get to a customer. We will be much more interactive with the customer base, which we think is a big advantage.

Okay. One last question regarding ECP. Obviously getting a little bit more mature over there in terms of the branch buildout and whatnot. What do you see as the biggest growth opportunity now over the next three years for ECP? Is it still blocking and tackling in terms of market share gains, or is it about the new product injections, or a combination of everything?

It's a combination of everything. There are absolute market share gains that we're continuing to get there and we will continue to get that we think. Adding the paint, adding the re-man engines now into the marketplace and calipers and transmissions, as well. We think that is really the big opportunity there.

Of course the Tamworth II is going to be absolutely critical to really outpacing our competitors and being able to get the product to them much more quicker. We think we are going to get a big competitive advantage when we get T II online, Tamworth II.

Great. Thanks for the time.

Thank you. David Kelly, Jefferies.

Good morning, gentlemen. This is David in for Bret Jordan. Just a couple of quick ones.

Could you may be provide some color on the ongoing MSO consolidation trend in the market? And maybe the impact you're seeing on alternative parts utilization at the moment?

Sure the MSO consolidation is continuing. There is several very active buyers of body shops. We believe that is a positive for us. These MSOs are very tied to the insurance industry and driving alternative parts. We are very pleased with that and I do not see that slowing down anytime soon, David. They are very aggressive in consolidating.

I did just see a just the recent report that there are still 40,000 body shops in the US. So there are still a tremendous amount of independence, but the consolidation will continue. As far as AP usage goes we have not seen the 2015 number yet from CCC, but we expect it to be relatively flat again at 36%, mainly as a result of the SAR rate. These new cars are demanding new parts. As I said earlier, we do think that the benefit as these tend to be higher priced parts. But we have seen interestingly enough is a number of parts per estimate continues to grow.

In 2015 it went up to 9.2 parts per parts per estimate, which is a huge trend in our favor. Obviously as cars get in accidents, we like to see parts get replaced versus repaired, because then we can sell products. We see that trend continuing for two reasons, one the complexity of cars. The aluminum car is coming. I know I see magnesium is being entered into the parts stream, as well.

These will get replaced more often than repaired. That's a positive. Then the complexity and the body shop industry tends to be focusing more on replacing than repairing. So all positive trends. And we think when the SAR rates starts to get into the sweet spot, we will see that in alternative parts usage go from 36% to even higher as the parts make their way into the system.

Alright great. Very helpful. And then just a quick follow-up here.

You mentioned your price paid at auction I believe was flat year over year, but the average age of the vehicle purchased was a year or so younger. Do you have a comparable same age change in price? We were just hoping to get a feeling for ASPs given some of the recent FX and scrap movements we're seeing in the market here.

I can tell you on self-service, the lower end car, our purchase price is down $51 sequentially. That's where you are going to see the scrap impact. Manheim has been stubbornly high still at 124.7 was the last number we saw. I did listen to the Car call, and I heard them say they're expecting used car prices to soften 3% to 5% this year.

So we do expect some relief there. But the new car that we are buying is critical to our strategy because as the SAR rate gets through, we're going to see more demand on that new car. The fact that the prices are flat when buying a newer car, we do know that is obviously a positive for us.

Great. Perfect. I appreciate the color, and thanks for taking my questions.

Thanks, David.

Ben Bienvenu, Stephens.

If I could just talk about weather quickly. You mentioned warmer winter weather, obviously that was a headline in the automotive space in the fourth quarter. Presumably that potentially diminishes the demand for collision projects in the period.

But if I recall in 2014 -- excuse me, in 2015 there was a backlog in a number of the repair shops as a result of a pretty severe winter weather outlook for the fourth quarter. Could you talk about maybe the puts and takes there across 4Q and 1Q and how we should think about that landscape in the current environment?

Yes, let me talk about how the quarter is looking thus far. January was on plan and thus far through February we are also a plan as well. We are up against some really tough comps in New England. As you remember last year they had a blizzard it seemed like every other week for January and February. So there was some backlog.

Just to put some color on the winter in Q4. ECP in December, their battery sales for one month were up 30%. That was a $2.5 million difference just in battery sales. The mild winter wasn't just here, it was also in Europe.

A little bit of an impact obviously in Q4. But so far through Q1 we're on plan and we are pretty happy. There were some horrendous storms that came through the southeast yesterday. Obviously those take time to get to the system we will see what that does. But so far we are pretty pleased considering the comps we were up against in 2014.

Great. And then maybe dovetailing on your ECP commentary the a two-year stacked on the same store steel bases nicely despite the warm winter weather. You talked about market share gains. Could you disaggregate for us, of the 6.8%, what was secular growth, what was market share gains, and what your expectation is there go forward

Yes, that is really hard for us to get our arms around, because so many of our branches over there, Ben, are relatively close together, and we are consolidating some branches and the like. We think that the majority is related to market share gains as we continue to expand out throughout the country. But every time we open up a little branch there's a little bit of cannibalization with the branches around it. It's really hard to disaggregate that the way you want it.

Sure.

I think it is fair to say though, Ben, that the industry is growing circa GDP. It feels like most of it is market share gains.

Okay. Great. One last one for me, sticking with Europe. The collision business, obviously, is a big opportunity longer-term. Any updates there, and some of the things you are working to build that business?

Sure. Now that we've got the Sator business done up, locked, basically, from a three-step to two-step, our plan is to launch that in Q3 or Q4 of 2016. One update on the UK, we did add one more insurance company into the program. So we are up to 9 of the top 10 insurance companies.

As I mentioned in my prepared remarks, it was still well over 20% growth, so still strong double-digit. We are very pleased with that and we are excited about bringing that to the continent. I think Rhiag also provides an opportunity there, as well, in the Eastern European companies. We are very excited about that opportunity and I expect to see something here in the tail half of 2016.

Very good. Good luck. Thanks.

James Albertine, Stifel.

I can speak wholeheartedly to that storm yesterday in Washington. If you do some water removal in basements, let me know. Real quickly, on the guidance, you mentioned FX and you also mentioned some headwind from Tamworth.

I did not hear any mention of scrap in the guidance. Maybe I missed it but what should we be considering, assuming there is continued pressure, as there has been sequentially, now for several quarters?

Yes, so it's prices particularly as scrap steel prices stay where they are there should be maybe a penny or so, maybe $0.02 at the most in Q1. But by then, most of the $80 scrap price will have rolled off and we would be in the clear. So, we are not anticipating a big headwind from scrap. But again that all assumes that prices stay where they are and they don't fall.

Got it. And I wanted to ask, as well, on the Rhiag side and going back I appreciate the appendices and apologies for having a confused initial look earlier on the guidance side. But with respect with one element of Rhiag, you had talked about in December refinancing an opportunity there. Is that considered in your $0.11 for the balance of this year? Or is that something that would be incremental theoretically due to the $0.11 guide?

No. That is included.

We assumed that we would take out the 7.25% fixed rate notes very quickly after closing and that is our full intent. Part of the reason why we increased the line of credit was to give us the flexibility to do that.

Now we will come back and at sometime during 2016, depending on how the euro markets are, is replace that with our own bond, which obviously it would be a fixed rate instrument at a higher rate than under our line of credit. But we fully anticipated in the $0.11 accretion in 2016 that we would be taking out all of the existing Rhiag debt.

Okay, great. And if I can ask just one more.

I know it's getting late in the call may appreciate you taking the question. On the working capital side, there seems to be quite a bit of change that you are unearthing.

Both you are working on things with AlixPartners and procurement and obviously you are bringing Rhiag here potentially, and then some of the three-step, two-step transitions. But how should we think about the big swings in working capital? What should we watch for as it relates to upside down side to your cash flow from ops guidance? Thanks.

So if you look at the funds flow statement, Jamie, 2015, a little bit unusual. As we told you going back a year, we had built inventories in Q4 of 2014 in anticipation of a potential port strike on the West Coast. As we came into the year, flush with inventory, so we did not need to add as much during the year to support the growth of the business. It was $83 million expansion in inventory during the year.

Accounts receivable actually went down in 2015. That is very unusual giving a Company that's growing its revenues. A lot of that had to do with some new things we were doing particularly over in the Netherlands at Sator. Some new focus on their receivables and processing if you will.

We do not anticipate we will get another down tick in accounts receivable. We actually think receivables are going to grow in 2015 as our revenues grow. And so, that is the biggest swing.

I know each year there seems to be something unusual. When you look at -- if you go back and you look historically at the cash flow from operations, we were at $206 million in 2012, $428 million in 2013, down to $371 million in 2014, up to $521 million in 2015. Most all of that has to do with swings related to working capital.

And what I would suggest if you trend lined it and normalized that to take out the peaks and the valleys, that is what you should be thinking about on a long-term basis, recognizing that in any given year things could move up or down a little bit.

Okay. That's incredibly helpful. I appreciate that. Just a follow-up to that.

The inventory you are buying some newer vehicles at a little higher price point, but you're buying fewer vehicles. Is that going to net out as we think about inventory swings? And granted you are working on improved turns and some other items that you noted with the AlixPartners work.

Yes. The item that you referenced, which is the procurement of cars and newer cars and the like, that only impacts our North American salvage business.

Actually most of the inventory is on the aftermarket business here in the US, the specialty business in the US, and the whole entirety of the European business, right? That's all aftermarket products. So, while there will be a little bit of an impact from the salvage operations, that is a minority of our overall inventory balances.

Okay. Great. I appreciate the clarification and best of luck.

Bill Armstrong, CLK & Associates.

I wanted to ask about Europe. Can you remind us what the average age of the car part is there, how that is trending and how that might impact demand for your aftermarket parts?

It's about 8.7, Bill, is the average age, but it is growing, like the US. So we do expect that to be a nice tailwind for our European car parts business. As those cars get older what you are seeing in the US, you will see more need for those mechanical parts. So definitely a positive trend.

Got it. Okay.

And one of the sort of futuristic question, I guess, and that is driverless cars, collision avoidance technologies. There are some out there that think that is going to eliminate accidents. How do you see that playing out in terms of how that might impact your business over the near term and then over the next 5 to 10 years?

Still very early days on that. And from the research we have looked at, Bill, most of this is currently an option right now. It is not a standard part, and it's mainly on higher end vehicles, although they are starting to work their way down.

There was actually a study done by Thatcham over in the UK that suggest that they believe claims volume will not drop precipitously, but severity will. They actually expect total losses to drop, but the number of claims will. So instead of that violent rollover collision, it will still be a collision, but it just won't be as severe. So they're actually predicting stability.

I think it is fair to say that it is still early days. But I will say this, it is actually part of our strategy to diversify the business. We do think it's coming. But everything we have read said it's a decade out problem at the earliest. We are going to continue to diversify the business, look to get away a little bit from the collision, as we have been doing over the last couple of years. But we do think there is at least a solid 10 years left of collisions that are going to stay pretty normalized.

Yes. That makes sense. Thanks very much.

Thanks, Bill.

Thank you.

I would like to now turn the floor over to Mr. Wagner for closing comments.

Thank you, Devon and thank you everyone for your time today. But before we sign off, I just want to announce that we are very excited about we will be hosting our first ever investor day in New York City on March 15, 2016. You will have the opportunity to hear from each of our segment leaders as they discuss their businesses and we look forward to providing a deeper dive into our Company. We hope you can join us either in person or via our webcast. Thank you, everybody.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.